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12 Biggest Financial Frauds Of Last Three Decades

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In this age of globalization, corporate social responsibility is perhaps one of the most difficult tasks for huge corporations. If you ask what’s corporate social responsibility, it is simply a form of self-regulation and integrity in a corporate scale. Throughout the corporate history, there are numbers of financial frauds and scams which evaporated billions and billions of dollars from investors and directly affected the lives of common people.

From Bernie Madoff’s Ponzie scheme to Enron’s mega financial scandal, this list includes every major financial crimes around the world that crippled economies, and took jobs in the last three decades. We can only hope that none of this happens ever again, but then we would be ignoring the human greed.

12. LIBOR

The Libor financial scandal was series of fraudulent schemes and actions related to the London Interbank Offered Rate or LIBOR, which took place in various parts of the world over a considerable amount of time. The LIBOR is basically an average of international interest rate, which is calculated after major banks all around the world submit the interest rate at which they are willing to lend capital to each other (bank to bank).

The LIBOR scandal was discovered for the first time after a controversial article was published in WSJ. The article suggested that some of the biggest banks might have understated their borrowing rates during the 2008 financial crisis, which led other institutions to misjudge the actual financial status of these banks.

The fraud finally became public in 2012, when the UK’s SFO launched an investigation on British and International banks to investigate the alleged manipulation of international interest rate benchmark. Over 20 banks around the world were addressed during court investigations.

11. Satyam Scandal

satyamChairmen Ramalinga Raju

The Satyam Scandal caused a havoc in the Indian IT industry, which involved one of the nation’s IT and business consulting firm Satyam Computer Services or Mahindra Saytam. In 2009, company’s founder and chairmen Ramalinga Raju confessed in a letter to the board of directors that he had falsified the accounts to show an inflated revenue of around $1.4 billion.

Following his confession, the SEC launched an investigation on the Indian arm of PwC (PricewaterhouseCoopers) and fined $6 million for not following the rules and regulation and maintaining auditing standards while auditing the accounts of Satyam Computer Services, which largely contributed to this scandal.

10. American Insurance Group (AIG) Scandal

AIGThe AIG Towers of Los Angeles

AIG financial scandal emerged in 2005 after US federal and state agencies initiated an investigation, possibly after getting signaled by a whistle-blower. Once believed to be ‘too big to fail’, this insurance giant would end in bankruptcy if it were not for federal assistance. The investigation uncovered a massive accounting fraud of nearly $4 billion, including instances of bid rigging.

The company had to settle with the SEC and pension funds of two different states for more than $2 billion. AIG played a pivotal role in financial crisis of 2008 in the United States than affected almost the entire western Europe and parts of Asia.

9. Lehman Brothers Scandal

Financial Crisis of 2007-2008Image Courtesy: businessinsider

Lehman Brothers was one of the oldest and prestigious investment banks in the United States. In 1997, the company entered into the risky business of mortgage origination, where in 10 years their total assets rose to an astonishing $680 billion out of which only $22.5 billion were in the form of firm capital.

In 2007, when the subprime mortgage crisis hit some of the major world markets, which largely contributed the financial crisis of 2008, made things worse for the firm. During that time, the firm reported an extraordinary amount of loss which lead its stocks to lose about 73% of its value.

Two years after Lehman Brothers insolvency, an investigation initiated by a court official revealed that Lehman’s top executives used several falsified accounting stunts to constantly cover up their huge losses at the end of each financial quarter. The investigation pointed out that the firm sold their toxic assets temporarily to a bank for $50 billion cash, which was supposed to be purchased back (repurchase agreement) before writing their balance sheets.

This created a false assessment that Lehman had $50 billion more cash and less toxic assets. Even-though the company didn’t go down solely because of accountancy malfeasance, it certainly contributed towards its demise in the 2008 financial crises.

8. HealthSouth Corporation Scandal

HealthSouth Corporation HQHealthSouth Corporation HQ

The Alabama based HealthSouth became a huge player in the U.S health care sector after a series of high class mergers and acquisitions throughout the 1990s under their CEO Richard M. Scrushy. In the 21st century, things were going smooth until problems with company’s accounts started to appear after an SEC investigation in late 2002.

It turns out that in 1996, Scrushy allegedly instructed company’s top officials to forge the balance sheets to show increased earnings in order to meet their certain business goals. The investigation revealed that the company inflated their earnings by $1.4 billion and in some fiscal years the reported income was as high as 4700%.

How he got caught?

The company came under the SEC radar after Scrushy sold $75 million worth of stocks just few days before the company reported a huge loss. Following the suspicion from SEC, HealthSouth appointed a legal firm to investigate Scrushy’s stock sale. However the U.S regulatory board was not satisfied.

7. Tyco Scandal

tyco

In 2002, the New Jersey based security company, Tyco International came into the spotlight after company’s former CEO Dennis Kozlowski and CFO Mark H. Swartz were accused of committing fraud by stealing $150 million and manipulating balance sheet in the process.

How they get caught

An Investigation led by SEC and District Attorney’s office unraveled several questionable accounting practices. The authorities also uncovered significantly large amounts of loan money that were made in favor of Kozlowski by the company, which were eventually forgiven.

6. Waste Management Scandal

waste managementCompany Headquarters in Houston, Texas

Waste Management, Inc. is an American multinational waste management company, which was founded in 1971 and headquartered in Houston Texas. Since its formation the company witnessed various allegations, lawsuits and fraudulent activities which peaked from 1992 to 1997. During that time, its top executives were involved in various cases of accounting malpractice.

After these accounting irregularities became public, company’s stock started to plummet drastically. Its stocks went down by 33% as investors lost a round figure of $6 billion in investments. On 8th July, 1999, a lawsuit was filed against the firm and its senior officers for issuing false statements. The accounting firm Arthur Anderson was also fined $7 million for its part.

5. Refco Scandal

refcoFormer Refco chief executive Phillip Bennett

Refco was an American financial services firm based in New York, which went bankrupt in 2005 after the discovery of a huge financial fraud executed by its CEO and chairman Phillip R. Bennett. In October 2005, the company made it public that Bennett had hidden $430 million in bad debts from its balance sheets.

Refco Inc. entered crisis on Monday, October 10, 2005, when it announced that its chief executive officer and chairman, Phillip R. Bennett had hidden $430 million in bad debts from the company’s auditors and investors, and had agreed to take a leave of absence.

It turns out that Bennett had been purchasing company’s bad debts to avert those from going into the balance sheet from Refco own money with the help of Liberty Corner Capital Strategy (a hedge fund). The official statement triggered an SEC investigation, which resulted in Bennett’s arrest and was charged with one count of securities fraud.

4. WorldCom Scandal

worldcom

MCI, Inc, currently a subsidiary of Verizon, was once a titan of telecommunication industry in the United States. This mega corporation was originally formed after the merger of MCI Corp. and WorldCom. The name changed a couple of times and finally settled for MCI after they dropped the WorldCom to complete the bankruptcy procedure in 2003.

Before the events of bankruptcy, company’s stocks were soaring and CEO Bernard Ebbers made quite a fortune from this. It all started in the year 2000,  when the U.S telecommunication industry was in decline and WorldCom was forced to abandon its supposed merger with the Sprint Corporation by the U.S Justice Department.

Three of the top most officials in the company, including Ebbers, Scott Sullivan as CFO, David Myers executed the fraud in mainly two ways. First, the company wrote their “line costs” or interconnection expenses as capital expenditures instead of expenses. And by increasing the revenue with false entries in their accounts.

3. Bernie Madoff Scandal

bernieImage Courtesy: Bloomberg — Getty Images

Bernie Madoff was undoubtedly the modern king of Ponzi schemes. For more than 20 years until he was arrested in 2008, Bernie Madoff successfully defrauded thousands of investors of billions of dollars with his investment strategy called “split-strike conversion.” In his scheme, Madoff offered his clients of high and steady return, which he actually managed by pooling all the funds in one bank account.

He used some of that money to refund his clients who wanted to cash out. Madoff would then fill the deficit by attracting new investors. This went on for years, a continuous cycle. But his scheme failed during the financial crisis of 2008, as he was unable to attract more clients because of the minimum liquidity in the markets. Federal investigations uncovered $64.8 billion of fraud.

Read: 16 Most Expensive Stocks (Per Share) In The World

2. Parmalat Financial Fraud

parmalat

After the events of WorldCom and Tyco International financial frauds, executives in the big European corporations insisted that nothing of that magnitude can even occur in this part of the world. Well, it turns out that no nation or continent is safe from greed. Parmalat SpA, currently a subsidiary of Lactalis corporation was once a giant of dairy food products that collapsed in 2003 after one of the biggest financial frauds in Europe.

The fraud gained the spotlight after the Bank of America released an exclusive record of Parmalat’s bank account and declared about €3.95 billion of its capital as a forgery. During further investigation, prosecutors discovered a gargantuan $20 billion deficit in their accounts. This amount makes Parmalat, one of the largest financial frauds in history.

1. Enron Scandal

enron

Once a darling of the Wall Street, Enron was formed by Kenneth Lay after successfully merging two of the biggest energy companies in Texas, Houston Natural Gas and InterNorth in 1985. By 1992, the company became the largest supplier of natural gas and owned various pipelines and electricity plants both nationally and internationally.

Read: 26 Worst Stock Market Crashes In History

The principle figure behind this scandal, Jeffrey Skilling the CEO of Enron, along with other officials fabricated various means and accounting loopholes to hide billions of dollars in debt from the stakeholders and the board of directors. After the company went bankrupt, its shareholders lost about $74 billion along with retirement funds and jobs.

The Enron case also raised new questions regarding the ethics of corporate watchdogs such as Arthur Anderson, Enron’s accounts auditor.